Sales and Promotions and the Great Recession Deflation

55 Pages Posted: 8 Mar 2021

See all articles by Demetris Koursaros

Demetris Koursaros

Cyprus University of Technology - Department of Commerce

Nektarios A. Michail

Central Bank of Cyprus

Niki Papadopoulou

Central Bank of Cyprus

Christos S. Savva

Cyprus University of Technology - Department of Commerce, Finance and Shipping

Date Written: November 5, 2020

Abstract

This paper investigates the effect of sales and promotions on the pricing decisions of firms by providing a novel theoretical model where firms face menu costs when adjusting their price and offer items on sale to attract bargain hunters. It is demonstrated that in a recession, the frequency of items on sale increases as well as the effort of consumers to locate such offers. Since the decrease in the cost of living following a recession comes both from price decreases and the combination of more frequent sales and more active bargain hunting by consumers, a price index that simply focuses on prices and neglects high frequency sales and their weight in the consumer's basket appears to be less responsive to shocks. This can explain the low response of inflation in the post-crisis period and thus the breakdown of the Phillips curve as sales items are under-represented in common price indexes. This study also show that a price index created by placing more weight on sale items in the UK CPI correlates better with the output gap, confirming the model's predictions. Additionally, if agents form inflation expectations using indices that neglect sales and promotions, recessions are exacerbated.

Keywords: Sales and Promotions, Deflation, Menu Cost, Discounts, CPI

JEL Classification: E31, E32, E58

Suggested Citation

Koursaros, Demetris and Michail, Nektarios A. and Papadopoulou, Niki and Savva, Christos S., Sales and Promotions and the Great Recession Deflation (November 5, 2020). Available at SSRN: https://ssrn.com/abstract=3762355 or http://dx.doi.org/10.2139/ssrn.3762355

Demetris Koursaros (Contact Author)

Cyprus University of Technology - Department of Commerce ( email )

Pavlou Mela
Limassol
Cyprus

Nektarios A. Michail

Central Bank of Cyprus ( email )

80 Kennedy Ave
1076 Nicosia
Cyprus

Niki Papadopoulou

Central Bank of Cyprus ( email )

80 Kennedy Ave
1076 Nicosia
Cyprus

Christos S. Savva

Cyprus University of Technology - Department of Commerce, Finance and Shipping ( email )

Limassol, 3603
Cyprus
00357252349 (Phone)
00357252674 (Fax)

HOME PAGE: http://www.csavva.com

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